Rick Perry’s Anti-Market Plan to Help Coal

By Jody Freeman and Joseph Goffman

Oct. 25, 2017

Image

Rick Perry testifying at a House Energy and Commerce Committee hearing in October.CreditCreditDrew Angerer/Getty Images

Lost in all the attention to the Trump administration’s effort to scuttle President Barack Obama’s clean power plan is its attempt to prop up the struggling coal industry by doing something very un-Republican — subsidizing it.

Last month, Rick Perry, the secretary of energy, asked the Federal Energy Regulatory Commission — the independent agency that regulates electricity markets — to adopt a new rule to pay certain coal and nuclear plants more than they would otherwise earn in a competitive market. In essence, consumers would pay these plants a premium for electricity that competitors could produce, and are already producing, more cheaply.

Mr. Perry’s plan is premised on two unfounded claims: First, it assumes that coal and nuclear power plants, because they can stockpile fuel on site, are uniquely able to enhance the “reliability and resiliency” of the electric power grid, especially in times of fuel supply disruptions. Second, it assumes that those plants are being driven out of business by unfair subsidies to renewable-energy producers, as Mr. Perry has repeatedly claimed or implied.

But a Department of Energy study conducted under Mr. Perry’s direction concluded otherwise. In fact, the retirements of aging coal and nuclear plants, the study showed, have not compromised reliability, the term used to describe the grid’s ability to keep the lights on under normal conditions. While the grid might need more bolstering in the future, “reliability is adequate today despite the retirement of 11 percent of the generating capacity available in 2002, as significant additions from natural gas, wind, and solar have come online since then,” the report noted.

The study also found that the availability of cheap natural gas, not renewable energy subsidies, was “the biggest contributor” to driving old coal and nuclear plants out of business. Other factors included the low growth of electricity demand, the rising availability of solar and wind power, and the costs of complying with environmental regulations, according to the report.

By putting a thumb on the scale for coal, Mr. Perry’s proposal would reverse 30 years of dogged work by successive FERC commissioners to promote fair competition in electricity markets. Rather than setting rates for each energy provider based on its production costs plus a reasonable return on investment — as FERC’s top-down regulation used to do — the agency has moved steadily to let the market set prices.

As renewable energy has come online, FERC has also worked to level the playing field, allowing wind and solar power to compete too, along with strategies that manage demand, like agreements with customers to reduce consumption when prices spike. These policies have benefited consumers by controlling costs, fostering innovation and helping to advance lower-polluting energy.

A policy reversal this momentous would normally require a strong justification, grounded in a theory of market failure, with sound evidence to back it up. Yet Mr. Perry’s proposal is so bare-bones that it failed even to define “resiliency,” an ambiguous term that evokes the grid’s ability to bounce back from unusual and unforeseen disruptions.

Selectively subsidizing coal and nuclear power is not the most obvious or best way to bolster the grid against sudden events. Nuclear plants already run nearly full-time, and coal plants are relatively slow to ramp up and down, making neither especially helpful if the grid suddenly needs more energy.

At the same time, wind power and strategies that reduce demand, like contracts with heavy electricity users to cut consumption when the system is stressed, helped grid operators manage the 2014 polar vortex, when bitterly cold temperatures struck parts of the East Coast. Why not pay these electricity providers for their contributions to resiliency?

To implement his policy, Mr. Perry must depend on FERC. The 1977 law that created the Department of Energy allows the energy secretary to propose but not to finalize rules for electricity markets.

Arbitrarily singling out coal and nuclear plants for special payments seems to violate the Federal Power Act’s requirement that FERC ensure no “undue discrimination” in electricity markets. So far, there is no evidence that would warrant intervening in the otherwise competitive markets the agency has so carefully nurtured.

Indeed, in response to Mr. Perry’s proposal, Robert Powelson, one of the three current FERC commissioners, and a Trump appointee, pledged not to “destroy” the electricity markets. “Markets have worked well and markets need to continue to work well,” he said this month. Another commissioner, Cheryl LaFleur, also expressed serious reservations.

Eight former FERC commissioners, from both parties, recently sent a letter to the agency opposing Mr. Perry’s plan after the agency requested comments. “Subsidizing resources so they do not retire would fundamentally distort the markets,” they warned. “The subsidized resources would inevitably drive out the unsubsidized resources, and the subsidies would inevitably raise prices to customers. Investor confidence would evaporate and markets would tend to collapse. This loss of faith in markets would thereby undermine reliability.”

Mr. Perry’s proposal to FERC also seeks to dramatically compress the normal timeline for approving such a complicated rule, shrinking a process that typically takes many months to a matter of weeks. This procedural anomaly prompted an outcry from nearly all of the affected stakeholders, from utilities to grid managers, who protested that there is no reason to rush.

Just this summer, the head of the North American Electric Reliability Council told Congress that “the state of reliability in North America remains strong, and the trend line shows continuing improvement year over year.”

Nevertheless, FERC has moved forward, putting the proposal out for public comment and creating uncertainty for the industry.

This process could still end well. FERC might ultimately reject Mr. Perry’s proposal because it runs contrary to decades of agency policy. Or, if FERC genuinely wants to bolster the resilience of the electricity system, it could scrap Mr. Perry’s plan and start fresh.

A good-faith proposal would start by offering a detailed definition of “resilience” that reflects the modern electricity system. It would explore the broad range of options our highly integrated and networked regional grids make available to strengthen the system’s performance — including natural gas, wind and solar power, strategies to reduce demand, and technology-based approaches that make grids operate more flexibly. Any provider that demonstrably enhances the grid’s capacity to withstand disruptions through any of these means should be eligible for additional revenue. This approach would harness market competition to incentivize innovation.

And if Congress wants to help nuclear energy, which is struggling to compete economically, it could adopt a carbon tax, which would favor nuclear power since it produces carbon-free electricity.

There is no reason, however, to keep the nation’s old and dirty coal plants on line just because the Trump administration likes them.

Jody Freeman is a professor at Harvard Law School and founding director of the environmental law program, which Joseph Goffman, a former senior official at the Environmental Protection Agency, will become executive director of next month.